Right now, the price of oil in February 2009 is less than the price of oil in April 2009 – a classic case of contango. If the opposite were true, it would be backwardation. USO, and most commodity funds, buy the “near month” contract. Since they don’t want to take delivery, the current month’s contract is sold before expiration and the next month’s contract is bought – called “rolling forward.”

USO’s prospectus warns of such a situation: a negative “roll yield” could cause the net asset value of USO to deviate significantly from crude’s spot price.

This is an important reason to read the prospectus of the fund you’re eyeing, and understand how different climates will impact the fund.

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